The Hackett Group Revisiting the Core Principles of Strategic Sourcing: Best Practices for Success

The Hackett Group

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Copyright © 2017 The Hackett Group, Inc. All rights reserved. World-Class Defined and Enabled. Kurt Albertson, Principal – Procurement Advisory Kurt Albertson is a Principal with The Hackett Group with program responsibility for North American Strategic Advisory programs focusing on client relationships, business development, research and program delivery. Mr. Albertson works with over one hundred Global 1000 companies leveraging research and thought leadership to provide strategic direction and best practice business advice within Procurement and Finance. Prior to joining the Hackett Group Mr. Albertson spent six years as a management consultant in Sourcing and Procurement during which he worked with executives from dozens of large corporations on sourcing, business and technical strategies, organizational and business process design, and cultural change. Mr. Albertson also has five years of automotive experience working in manufacturing, quality, and operations. In this role he designed and implemented global manufacturing processes and supervised production operations. Mr. Albertson has been quoted in the Wall Street Journal and other major publications, has been the key note speaker at many national events, and travels globally to support client objectives.

Contact Information: 770-225-7570 [email protected]

. Review the core steps of the strategic sourcing process and deliverables . Review some of the critical enablers for success . Understand the key tools associated with strategic sourcing and a review on how to apply TCO and Porter’s Analysis

Strategic sourcing is an approach to supply chain management that formalizes the way information is gathered and used so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace.

Source: whatis.com

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2016 Enterprise Key Issues -PR 6 Top ten priorities for state procurement in 2017 - NASPO

1. Strategic role of state central procurement 2. Procurement workforce professionalization 3. E-procurement/ ERP solutions 4. Measuring performance 5. Effective sourcing strategies 6. Staffing and talent management strategies 7. Information technology 8. Contract management 9. Cooperative purchasing 10. Procurement reform and state-wide centralization

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2016 Enterprise Key Issues -PR 7 For Procurement organizations there’s room to be more strategic in their sourcing approach

How strategic is your strategic sourcing process?

Truly strategic; we create business advantage through 3% category management, innovation support, and beyond

Very well implemented; only 2% We don't have a strategic sourcing process a few opportunities remain, 2% and they're outside our sphere of control Tactical at best (e.g., reactive late-stage negotiations) 10% 5% Good n-step sourcing process on paper, but biased to easy savings and shortcuts

53% 25% Pockets of excellence, but no standardized process. Multiple approaches and templates/tools.

Well-implemented for many categories, but not pushing boundaries in demand mgmt, complex categories, globalization, and extended supply chain

S1 S2 S3 S4 S5 Need Pre- Solicitation Solicitation Evaluation S6 S7 Identification Solicitation Preparation Process Process Award Contract You receive a Deciding on Complete Contract requisition which Analyze Assessment and Create Acceptance of Handle and/or a request Purchasing Supplier’s Supplier Specifications Bids/Proposals Protest(s) for product or Methodology Responses Performance service to use Report Considering Meet with End- the number of Development Conduct Consider Issue Notice of Renewal of existing User to gather contract of Sourcing Pre-Bid and/or Reciprocal Intent Award contract information renewals to Strategy Site Visits Preference Law (NOIA) use Decide on Determine Solicitation has specific Deciding Document and which closed, no category (IT, whether to use store Create contract Solicitation Posting of Bid additional Goods, or Open or Fixed contract/purchas administration plan Tool that will bids/proposals Special Contract e details be used will be accepted Services) Review Select supplier Review Order of Writing Determine Issue Notice of Delivery to award Sustain Results Precedence Specifications Posting Timeline Award (NOA) Requirements solicitation

Source: DOAS Strategic Sourcing Process

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 9 A generic 7-step Strategic Sourcing process: Key objectives and activities 1 2 Develop 3 4 5 Negotiate 6 7 Profile Identify Evaluate Transition Manage Sourcing with Category Suppliers Suppliers Suppliers Suppliers Strategy Suppliers .Understand .Evaluate .Establish .Conduct & .Develop .Execute .Monitor internal profiles and selection evaluate negotiations supply market and spend and develop criteria and supplier plan & select agreement supplier external sourcing conduct evaluation supplier(s) & supplier performance supply strategy supplier and finalize transition market assessment sourcing Key Key Objective plan .Structure & .Set Sourcing .Prepare .Customize .Plan/ .Develop .Establish Mobilize Objectives Supplier and Execute Scorecards SRM Sourcing Assessment Execute Negotiations Governance Develop Execute Team . Supplier and Select . Sourcing Execute Transition Manage . Evaluation Supplier(s) . .Profile Strategy Supplier Supplier Demand Assessment .Finalize .Plan Supply Performance Finalize . Sourcing Transition

Key Activities Key Profile Sourcing . Plan Supply Strategy & .Award Market Align Business Stakeholders

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 10 A generic 7-step Strategic Sourcing process: Key deliverables 1 2 Develop 3 4 5 Negotiate 6 7 Profile Identify Evaluate Transition Manage Sourcing with Category Suppliers Suppliers Suppliers Suppliers Strategy Suppliers

.Team .Sourcing .Supplier .Supplier .Draft Tenets .Supplier .Supplier Members and Strategy Assessment Evaluation of Agreement Scorecards Management Stakeholders .Risk Matrix Matrix (TOA) .Finalized Plan List Assessment .Prerequisite .Supplier .Negotiation Transition .Work Plan Supplier Evaluation Plan Plan .Demand Documentation Package .Finalized .Key Profile .Supplier .Updated TOA Learnings

Key Deliverables Key .Supply Profile Assessment Cost Model .Draft Report .Draft Cost Package .Sourcing Transition Model .Evaluation Plan Plan .SWOT Supplier List .Stakeholder .Business Analysis Alignment Award Plan .Initial Checklist .Stakeholders Supplier List Approval Checklist .Signed Supply Contracts

Distribution of time spent across sourcing processes:

Requirements definition 16% Development of sourcing strategy/documents 13% Supplier identification/discovery 6% 9% Supplier qualification

19% Supplier evaluation and selection Supplier regulatory/risk assessment 6% 6% Contract creation

19% Contract negotiation

6% Contract approval and signature

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 12 Critical Enablers of the Strategic Sourcing Process While strategic sourcing skills are critical the most widely needed skills in procurement are business skills Critical procurement skills GENERAL BUSINESS SKILL PROCUREMENT-SPECIFIC SKILL

Relationship management and interpersonal Strategic sourcing process expertise Business Skills are generally Problem-solving more transferable Strategic thinking and analysis across functions and roles while Specific supply market/commodity expertise Procurement skills tend to be Business acumen more relevant to SRM expertise Procurement and related roles Group collaboration/facilitation Organizational know-how

Scale: Data analysis and modeling Low = A critical skill for <25% of positions Medium = A critical skill for 25-50% of positions High = A critical skill for 51-100% of positions Low Medium High

Source: Skills and Talent Outlook, The Hackett Group, 2014

Capabilities that will help the most to achieve a Trusted Advisor status

Source: Key Issues Study, The Hackett Group, 2016

Strategic Sourcing Cross-Functional Stakeholders . Senior Management . Research & Development . Sourcing & Procurement . Operations . Finance . Marketing . Legal . Supplier Diversity Strategic Sourcing Team Structure

Senior Core Team Management . Team Lead: Responsible for the day-to-day Sponsor -Category direction of and involvement in all stages of -RM Marketing Team Sourcing Team SME SME -VO Lead -Supplier Member . Team Member: Responsible for representing key Member Diversity stakeholder interests Member Member SME SME Member Finance & Sponsorship & Subject Matter Experts (SME) Operations SME Legal . Sponsor: Responsible for general oversight of

strategic sourcing process. Research & . SME: Responsible for providing expert level input Development (e.g., legal, quality, operations, etc..) as requested by the Sourcing Team.

In 1906 there was a county fair where attendees were invited to guess the weight of a large ox. Excited at the chance to win the cash prize, over 800 people took a guess. Not one guess was right, but afterwards a statistician took a look at all of the answers and discovered something remarkable: the average of all the guesses was 1 pound less than the actual weight of the ox. The take away: a crowd can be much smarted than any one of its members, even if they aren't working together.

. Spend Analysis (Demand Profile) . Market Analysis . Strengths, Weaknesses, Opportunities, and Threats (SWOT) . Total Cost of Ownership (TCO)* . Risk Assessment . Porters Five Forces (Quadrant Analysis)*

*We will walk through an exercise

These tools build upon one another to arrive at the category strategy and are best applied through facilitated exercises with stakeholders

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 19 Spend analysis looks at who is buying what from whom? A spend cube is multi-dimensional view of all external vendor spend categorized by commodity, supplier and a regional / organizational component

Potential Data Sources Key Activities Desired Output . General Accounting . Clean supplier data (e.g., Ledger IBM = I.B.M. = . Accounts Payable Files International Business Machines) . Historical Payment Records . Eliminate any redundancy or overlap of data sources . P-Card Records . Define all dimensions of . Functional or Business the spend data as needed Unit databases (e.g., Business Unit, . Supplier invoices and Customer, Geography, Spend Sub-Category, Sourcing Cube ($$)

summary data / Categories -

Group) BuysWhat?

. Purchase Orders Sourcing Groups Sourcing . Establish rules to align Sub . T/E Systems source data with each . Suppliers dimension of the spend cube . Compile spend cube . Validate spend cube output with internal users What sources do you use? What level of visibility do you have? What? Who? From Whom?

1. Industry Level Analysis – explores the trends, technologies, cost drivers, etc.. of the supply market 2. Supplier Level Analysis – identifies key and niche suppliers, profiles capabilities, strengths, and weaknesses of suppliers 3. Sourcing Strategy Best Practices – document sourcing strategy levers being used by other companies with supply market

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 21 Example Industry Level Analysis: Higher demand for integrated facilities management is expected to outpace overall outsourced growth Global Outsourced FM Market (2011) by Service Types Global Outsourced FM Market (2017 (F)) by Service Types Global Outsourced FM Market (in $ Billion) I-FM, 12% All Other Services, I-FM, 88% 15% 2011 $535.0 All Other Services, 85% 2017 (F) $641.1 Source: Frost & Sullivan . Worldwide total outsourced FM market valued at $535 billion in 2011; market expected to grow to more than $640 billion in 2017 . I-FM market generated revenue of $64.2 billion in 2011, which is 12% of the total outsourced market. It is expected to grow to $96.2 billion in 2017. – Both mature and emerging economies will see rising demand for I-FM services mainly because of its high cost-savings potential – Mature economies like North America and Europe make up the major share of the global I-FM market and are expected to contribute more than two-third of the market in 2017 – Despite high growth rates, total contribution to global market by emerging economies like India and China remains low* – Service providers differentiate their service offerings by providing value-added services like energy management * Note: See appendix for additional data on I-FM on a regional basis

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 22 Example Supplier Level Analysis: In-depth analysis of each major supplier in a category helps identify potential opportunities and sources

Supplier Cost Structure Supplier Key Financial Indicators

2006 2007 % Change Revenue 12,765.1 14,044.7 10.0 Rev Long Distance 7,277.4 8,302.1 14.1 14,045 2,267 -16,1% Operating Income 14,000 Local and Other 4,719.4 5,166.1 9.5 Emerging Business 0 0.5 7,029 - 50.0% 12,000 Product Dist. & Dir. Pub. 1,148.0 1,225.9 6.8 10,000 Other (379.7) (649.9) (71.2) 8,000 Net Income 395.3 1,183.8 199.5 Total Cost Cost Total  6,000 3,158 -22.5% Exp Assets 15,195.9 16,953.0 11.6 4,000 11,778 Return on Assets 6.3 7.4 17.5 2,000 1,591 -11.3% Return on Equity 8.6 17.97 109.96  Return on Revenue 3.1 8.4 170.97 0 Cost of Service and Selling & Gen Dep & Operating Expense 10,930.8 11,777.5 7.7 Products Admin Amor Employees 48265 48,000 (0.5) Stock price per share 32.69 39.88 22.0

Key Business Issues Geographical Scope

 High level of customer defection  Poor integration of X Nationwide and 290  Consolidation of industry players countries worldwide

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 23 Example Sourcing Strategy Best Practices: Examine the practices that other organizations have leveraged to deliver value in the category

. Development of long-term collaborative relationship with facility service providers to reduce cost . The degree of integration with service provider should depend on the complexity of services, not on the volume of purchase . Rationalize unnecessary service requirements for cost savings . Leverage suppliers that are able to service the entire enterprise to receive favorable pricing . Establish Key Performance Indicators (KPIs) to manage overtime paid and productivity levels . Perform predictive modeling to forecast and plan for events, ensuring budgeting execution

Source: The Hackett Best Practices

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 24 A Strengths, Weakness, Opportunities and Threats (SWOT) analysis helps uncover potential value levers around the category Internal External (Within the Buyer) (Outside the Buyer) Strengths Opportunities . Buyer characteristics that create or . External market influences that enhance the Buyer’s power in the present a potential benefit to the market Buyer

Weaknesses Threats . Buyer shortcomings that reduce or . External market influences that pose eliminate the Buyer’s power in the a risk to the Buyer market

Facilitate a discussion with stakeholders around their perspectives for each of the four areas and then think about how strategy will leverage

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 25 Total cost of ownership analysis models all relevant costs associated with a sourcing decision for a material or service .Supplier Price and Terms - Unit price charged by a supplier to create a material or service ready for delivery and transaction terms for payment Total Cost of Ownership .Delivery Costs - Cost to deliver a completed material or service to its internal point of use Supplier Operations Delivery .Operations and Quality Costs Price and and Quality Other Costs + Costs + + - Operational cost and supporting infrastructure Terms Costs implications associated with purchasing a material or service from a supplier - Quality cost implications of purchasing a material or service from a supplier .Other Costs - Miscellaneous standard and situational costs associated with purchasing a material or service from a supplier By understanding the overall cost of a category we can align our strategy to deliver on a broad set of stakeholder business objectives

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 26 The first step of the TCO is to breakdown the total supplier purchase price into the supplier’s cost elements Example Supplier Costs Allocated to the Unit Cost Element Definitions Margin Gross profit charged by supplier in excess of their costs for the part SG&A Sales, general, and administrative expenses – Capital Expenses expenses related to sales activities and costs Amortization to manage the ongoing business activities of the supplier Overhead Accounting cost of fixed asset investments that are spread across the life of the asset Manufacturing Expense group necessary for business function Expenses that does not usually contribute to profits— insurance, permits, rent, utilities, etc. Direct Labor Non-labor expenses to fabricate and assemble

Total Purchase Purchase Price Total a part—energy, packaging, etc.

Cost of labor that can be directly attributed to Direct fabrication and assembly of the part Materials Cost of materials that can be directly attributed to fabrication and assembly of the part

Understanding supplier’s cost elements as an allocation against the total purchase price helps develop our strategy and focus discussions

Supplier Price and Delivery Costs Operations and Other Costs Terms Quality Costs In-Plant Material Logistics Costs Supplier Unit Price Inventory Standard . Direct Material . In-Country Transportation . Intra-Plant Demand . Risk . Direct Labor . Ocean / Air Freight . Safety Stock . Qualification . Indirect Labor . Destination Transport . Management . Overhead Region / Country- In-Plant Material Situational . Capital Amortization Specific Costs Handling . Local Taxes . Customs Duties . In-Plant Handling . Procurement Staff . Manufacturing Expenses . Value-Added Taxes . Plant Warehouse - Domestic . Local Regulatory Operations and Overhead - Foreign Compliance Costs . Broker Fees . Infrastructure Terms Cost of Quality Supply Chain - Technology - Facilities . Net Payment Terms . Quality Validation . Inventory Maintained in . Exchange Rate . Volume Discounts . Quality Comm’ns. the Supply Chain Differentials . Free Goods . Performance Impact . Satellite Warehouse . Tooling / Molds . Incremental Remedies Operations/Overhead

Supplier Price and Delivery Costs Operations and Other Costs Terms Quality Costs Supplier Unit Price Logistics Costs Standard

. Direct Material . Freight / shipping for . Risk supporting materials and . Direct Labor Service Integration . Qualification . Indirect Labor media . Management . Electronic delivery cost . Business support staff . Overhead Region / Country- . Requirements gathering . Capital Amortization . Training Specific Costs Situational . Local Taxes . Implementation . Local Regulatory . Customs Duties . Additional hardware / . Procurement Staff Compliance Costs . Value-Added Taxes software . Telecom - Domestic . Software / Hardware . Internal testing - Foreign . Travel and Expenses . Roll-out costs for process . Broker Fees . R&D change . Infrastructure . Development Expenses Cost of Quality - Technology - Facilities Terms . Quality Validation . Exchange Rate Differentials . Net Payment Terms . Quality Comm’ns. . Volume Discounts . Performance Impact . Incremental Remedies

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 29 Example of breaking down the “Supplier Price” for staff augmentation services Example Markup Breakdown Markup Component Average Adder Total per Hour Rate Statutory Payroll Burden 11.3% Company Payroll Burden 5.8% Company Pension 1.9% Markup Vacation/Holidays 5.1% 39.6% Insurance 3.4% Bonus/Stock Options 2.1% Other 2.3% Overhead and Profit 22.4% Overhead 13.9% Wage Rate Profit 8.5% 60.4% Total Markup 39.6%

Understanding the price paid breakdown helps us with strategy, negotiations and collaborating with suppliers and stakeholders on value opportunities

Delivery Costs Operations and Quality Costs Other Costs Onboarding Costs Mod Workspace Costs Mod Loss of Knowledge Sign

Acquisition Costs Min Productivity Ramp Mod Co-Employment Risk Sig

Background Check Min Off-Boarding Costs Mod Data Security Risk Sign

Drug Testing Min Rework/Quality Costs Mod Retention Costs Mod

Training Mod Management Costs Sig Over Spec. Costs Mod

Travel/Moving Costs Invoice and Payment Mod

Cost Impact Sign – Significant Mod – Moderate Min – Minimal We generally fail to understand the true impact of these other cost elements leading to internal stakeholder dissatisfaction or other long-term problems

Commodity Risk Profile Risk Statement Risk Mitigation Action

H Risk #3

Risk #4 Risk #6

Risk #5 Business Business Impacted Risk #1 Risk #2 L L Risk Probability H For all high risk/impact factors we must identify the risk and then develop a risk mitigation strategy that can be addressed thru the sourcing strategy

Five Market Forces Analysis Business Impact Analysis

Expense Base Impact New Entrants

Customer Value Impact

Product Differentiation Supplier’s Power Rivalry Among Impact (2nd tier) Competitors Buyer’s Power Leading Technology Impact

Substitutes Failure Impact

Low High (1) (5)

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 33 Category Category Category Category Category Strategy Performance Segmentation Strategy Governance Execution Management The results of Porter’s analysis identifies where on a two- by-two sourcing matrix a category most closely aligns High

Leverage Strategic

Routine Bottleneck Business Impact Business

Low Market Complexity

Low High

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 34 Categories within each of the quadrants generally have similar characteristics Leverage Strategic . High-expenditure area . Strategic to profitability and . Many existing alternate products and operations services . Few qualified supply sources . Many qualified supply sources . Large expenditures . Goods and services are readily . Design to quality critical available . Complex specifications . Commercial involvement can significantly impact price

Routine Bottleneck . Very complex specifications requiring Business Business Impact . Many existing alternate products and services complex manufacturing or service process . Many sources . Few alternate products available . Low value . Few qualified sources of supply . Small individual transactions . May have a big impact on ongoing . “Anyone” could buy it operations or maintenance . Unspecified items for everyday use . New technology or untested processes involved in provision of the product or service

Supply Market Challenge

Purchase Demand Management Supply Base Management Total Cost Management Sourcing Matrix Reduce Optimise Total Eliminate/ Quadrant Reduce Consolidate Optimise Restructure Increased Restructure Lifecycle/ Total Supply Chain Reduce Placement Consumption Spend Specification Supply Base Competition Relationship Ownership Costs Transactions Costs

Leverage

Routine

Bottleneck

Strategic

High Opportunity Low/No Opportunity

Entry Barriers 3 • Current participants have very low manufacturing costs • Medium capital requirements for converting plant (<10 MUSD) • Generally low profitability in industry, detracting possible entrants • High threat of forward integration Buyer Power 4 • Fragmented customer base – except by the Food/ Dairy industry, responsible for Supplier Power (2nd tier) 4 Intensity Of Rivalry 5 40% of the corrugated material consumption • Large players in highly capital intensive • Mature product, relatively slow industry • Recent mergers, created room for industry growth, intense competition specification deproliferation (SKU • Profitability in industry very dependent on • Undifferentiated product, competition is based rationalization) raw material price and capacity utilization on cost and geographical location • High pricing transparency – most models • Paper suppliers are under pressure to • Concentration movement in the last 5 years, depends on Linerboard prices increase value added through forward top 5 companies hold 73% of the production • Largest FMCG firms generally more integration volume in the U.S. globalized than corrugated producers, • Some suppliers, like IP, Smurfit and • Integration level is high, practically top 5 driving consolidation in corrugated industry, Georgia Pacific have strong presence in corrugators also dominate linerboard and e.g. Smurfit-Stone the paper and wood pulp market corrugate medium market • Largest customers are driving product development in corrugated, aiming to Pressure From Substitutes 2 reduce total use of packaging material and make it more environmentally friendly • Plastic is still a viable threat for fast-moving, non-branded goods in “re-usable” applications, although currently growing at a slower pace than corrugated • Chipboard is losing market share to 1 5 corrugated in heavy-duty segment Low High

Market Competition Is High If… Yes No N/A .Numerous or equally balanced competitors within supply market exists .Slow industry growth is occurring in supply market .High fixed or storage costs exists within the supply market .Lack of differentiation or low switching cost exists between suppliers .Capacity additions to the supply market must be made in large increments .High exit barriers exists for suppliers to leave the industry (e.g. environmental, regulatory)

Overall Rating: Rivalry among competitors High Low (5) (1)

Barriers To Entry are high if… No Yes N/A .Economies of scale (i.e., computer industry) exist within supply market .Differentiation of products enabled by supplier (i.e., cosmetics) .Significant capital requirement are needed for suppliers (i.e., oil extraction) .Switching cost to new supplier are high (i.e., chemical industry) .Access to distribution channel are limited (i.e., food industry) .Cost disadvantages independent of scale . Product know-how or design characteristics exists . Favorable access to raw materials by suppliers . Favorable locations for suppliers exist .Government policy (i.e., regulated industries, railroads, trucking)

Overall Rating: Barriers to new entrants Low High (1) (5)

The opportunity to substitute products/services Yes No N/A .Is the relative price of a substitute product/service low compared to existing? .Is the cost of switching to the substitute low? .Is the buyer’s propensity to switch low?

For the most likely substitute products/services Yes No N/A .Subjected to trends improving their price value ratio (i.e., catalytic converters…) .Produced by industries earning high profits encouraging new entrants (i.e., computers)

Overall Rating: Threat of Substitutes High Low (5) (1)

A Supplier Group Is Powerful If The Following Apply No Yes N/A .It is dominated by a few suppliers and is more concentrated than the industry it sells to .It does not have to contend with other substitute products/services for sale to the industry .The industry is not an important customer of the supplier group .The supplier group’s product is an important input to the buyer’s business .The supply group has built up switching costs (product/service differentiation) .The supply group poses a credible threat of forward integration

Overall Rating: Suppliers Power Low High (1) (5)

A Buyer Is Powerful If… Yes No N/A .It is concentrated or purchases large volumes relative to the supplier’s sales .The product/service purchases from the industry represent a significant fraction of the buyer’s spend .The product/service it purchases from the industry are standard or undifferentiated .It faces few switching costs to move suppliers .It earns low profits leaving little opportunity for suppliers to aggressively increase price .It poses a credible threat of backward integration (make/buy) into supply market .The supply industry’s product/services is unimportant to the quality of its products/service .It has full information about supply marked

Overall Rating: Buyer’s Power High Low (5) (1)

. Does the total purchase cost for the No Yes Category represent a major part of the Expense Base Impact company’s total external expenditures?

. Do customers perceive that the Category Customer Value Impact provides significant value?

. Does the Category differentiate the end Product Differentiation product in an important way? Impact . Does the Category provide access to leading technology critical to the value your Leading Technology Impact customer perceives? . Would a Category’s failure or shortage Failure Impact affect your customer’s satisfaction?

Overall Business Impact: Low High (1) (5)

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 44 Changes in the business environment: Assess to insure no major changes that would impact analysis Business Requirements/Trends New End Products/Customer • Redistribution of the value-added component • New market Requirementssegmentation of the value chain (integration/de-integration) • New market entry • Cross business integration • Changing customer needs • Globalization • New functions of use • Shifts in supply chain leadership (e.g., from • Product/service extension and bundling manufacturing to retailers)

Technology Changes Macroeconomic/Regulatory Factors

• Product/process technology • Safety regulation changes breakthrough • Anti-pollution legislation evolution • Technology transfer from different • Trade regulation changes business • Political environment uncertainty • Complementary product/process technology improvements

It is always good to make sure there are no expected changes to the market or category usage that would significantly impact analysis

Business Impact High Leverage Strategic Expense base impact L H Customer value impact L H Product differentiation impact L H

Leading technology impact L H

Failure impact L H Routine Bottleneck Business Impact Business Overall Business Impact L H

Market Complexity Low Competition among suppliers Market Complexity H L • Rivalry among competitors Low High • Barriers to new entrants L H • Opportunity for of substitutes H L Leverage Create • Supplier’s power L H the an Spend Advantage • Buyer’s power H L

Overall Market Complexity L H

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 46 “Strategic” category objectives are around product/service differentiation and “Best of Breed” suppliers Emphasis Leading Practices . Partnership / alliance or compensating strategy . Long term / service life agreements . Internal intelligence of product/service cost . Joint product/ process design drivers and market . On-site representation . Continuity of supply . Seamless supply chain processes . Supplier / customer cross functional integration between companies I.e. integrate . Total cost approach supplier and customer processes . Significant joint cost reduction and performance . System linkages improvement initiatives . Supplier manages product / service Supplier Characteristics . Prepare contingency plans (back-up supply and exit strategies) . Technology / market leader . Sophisticated support systems . Financially stable . Compatible business strategies . Managed supply chain

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 47Business Advisory Services | 47 “Leverage” is about minimizing total cost

Emphasis Leading Practices . Total cost reduction / value enhancement: . Competitively bid agreements . Process improvements . Establish leverage position . Design changes e.g. standardization, . Create consortium procurement consolidation . Break-out transportation costs/ . Procurement process e.g. spot-buying, manage separately competitive tendering, trade . Pursue value-added services from . Internal and external intelligence of product/ service suppliers that reduce cost cost drivers, market trends, new entrants e.g. supplier managed inventory . Rationalization (‘right-size’) of the supplier base . Use flexible agreements (within while maintaining multiple qualified sources qualified supplier base) . Co-ordination of requirements to maximize buying . Respond rapid to market changes power

Supplier Characteristics . Comprehensive Sourcing Group coverage . High, consistent quality levels . Electronic ordering capability . Supplier services provided e.g. inventories, maintenance

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 48Business Advisory Services | 48 “Routine” is about minimizing cost of acquisition and supplier consolidation

Emphasis Supplier Characteristics . Directionally correct / common sense . Comprehensive Sourcing Group coverage decisions without substantial inventory investment . Speed-to-implementation . Efficient order to delivery process . Supplier consolidation . High service ratings . Flexible agreements . Flexible automated support systems . Minimal investment in inventory / eliminate safety stock Leading Practices . Streamlined and simplified processes . Long-term, competitively bid / negotiated (procurement, A/P, receiving) : supplier agreements — Elimination of paper and electronic . Suppliers own specifications paper equivalent . Supplier incentive to substitute / standardize; — Automation use industry specifications — Minimization of approvals . Reduce inventory e.g. supplier managed — Periodic audits vs. detailed reviews inventories — Supplier provided usage reports . Outsourcing . Consortium procurement . Budget holder empowerment e.g. end-user release and decentralization . Electronic catalog ordering

© 2015 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Business Advisory Services | 49 “Bottleneck” is about minimizing items and ensuring supply continuity Emphasis Leading Practices . Research opportunities to eliminate, substitute or . Life of product / long-term agreements standardize . Provide to supplier reason to become . Research alternatives or ability to extend to other ‘preferred’ products . Knowledge/ technology transfer . Reduce life cycle costs . Market exposure . Integrate with other agreements . Expand relationship . Aligned with proactive suppliers . Process improvement . Reduce maintenance and operating costs . Product development . Service level agreements . Ownership stake . Managing the whole supply chain Supplier Characteristics . Development of new suppliers . Niche market/ product supplier . Advanced design/ technology

. Strategic sourcing provides a formal approach to optimizing value of a sourcing approach . In addition to a foundational understanding of the strategic sourcing approach relationship management skills are a critical enabler . The power of the strategic sourcing process is in facilitating fact-based discussions with a cross-functional team using proven tools that drive towards recommended strategies . Understanding the total cost of ownership for a category will help deliver greater overall value to stakeholders as well as understand where greater cost reduction opportunities may exist . Porter’s analysis is a powerful tool for driving towards a recommended category strategy in a thoughtful and fact-based approach helping create buy-in from internal stakeholders

Kurt Albertson

Principal – Procurement Advisory 770-225-7570 [email protected]